Saudi Arabia to return to growth next year, IMF says

The purchase will grant AOC the ability to increase its offerings in the north-west European refining hub. Saudi Aramco

Saudi Arabia, the biggest Arab economy, is expected to return to growth next year thanks to expansion in its oil GDP, which has slowed because of the kingdom’s compliance with a global oil output cut that will end in March next year, the IMF said.

Saudi Arabia, the world’s biggest oil exporter and Opec’s kingpin, helped broker a deal with Russia, the biggest oil producer globally, to trim global oil production by 1.8 million barrels of oil per day (bpd) to help lift prices.

The deal, which expired in June and was extended to March next year, has helped Brent oil prices recover and rise to around US$56 per barrel. Russian President Vladimir Putin said on Wednesday the agreement with Opec and other oil producers to reduce production could be extended to the end of 2018. At 18:15 Abu Dhabi time oil prices were hovering around $56.55.

“In 2018, growth is projected at 1.1 percent as real oil GDP growth turns positive, but non-oil growth slows in line with faster fiscal consolidation,” the fund said, adding it is predicting a near zero growth of a 0.1 per cent this year.

Non-oil GDP is forecast to grow 1.7 per cent this year thanks to better business confidence, the restoration of public sector allowances and projected increase in investments from the country’s sovereign wealth fund, the Public Investment Fund.

But oil GDP will slip by 1.9 per cent due to the country’s adherence to the global oil deal. The Saudi economy contracted in the first two quarters of this year because of lower oil revenues and government austerity measures. Its GDP shrank 1 per cent year-on-year in the second quarter after contracting 0.5 per cent in the first three months of this year.

The kingdom is undertaking massive economic transformation plans aimed at diversifying its oil income and creating new revenue streams to cope with the low oil price era.

The country’s Vision 2030 and 2020 National Transformation Programme, which were revealed last year, include fiscal measures aimed at balancing the fiscal budget and boosting non-oil growth.

“Over the medium term, oil output is projected to grow by around 1 per cent a year,” the fund said. “While fiscal consolidation will remain a drag, the ongoing implementation of structural reforms is expected to see an acceleration in non-oil growth to around 3 per cent.”

The government which is seeking to balance its budget by 2020 through a series of reforms that include hiking water, electricity and energy prices and introducing a 5 per cent value-added tax next year. The government began in 2015 removing energy subsidies and introduced in June excise taxes on tobacco, energy drinks and soft drinks.

These reforms could generate additonal non-oil revenue of 4.8 per cent of GDP and gross substantial fiscal savings of 254 billion riyals by 2020, the fund said.

The government needs to introduce new stimulus measures to help nudge non-oil GDP, which slowed because of lower government spending over the last two years, according to Dima Jardaneh, head of MENA economic research at Standard Chartered. She is forecasting 1.6 per cent growth in 2018.

“Stimulus measures to support the private sector would be needed to spur private growth,” said Ms Jardaneh. “Reversal of the cuts in benefits and allowances [of public sector employees] may help boost household consumption for the remainder of 2017 and into 2018.”

The kingdom began tightening spending in 2016 to help bring down the fiscal deficit which reached a record 367bn riyals in 2015 because of plunging oil prices.

Saudi Arabia expects to narrow its budget to 198bn riyals this year, which is 7.7 per cent of GDP (in fixed prices) and down by 33 per cent year-on-year from 297bn riyals in 2016.

The fund has advised Saudi Arabia to slow down the pace of fiscal consolidation in order to maintain growth and the kingdom is considering such moves, the IMF said.

“The authorities indicated that they were considering the appropriate pace of fiscal adjustment given the weak growth,” said the fund.